Example Scenario #1 - Points & Fees Scenario... 17

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1 Table of Contents Dodd Frank Act Legislative History... 3 Covered & Excluded Loan Types... 3 Definitions - Terms to Know... 6 Ability to Repay (ATR)... 6 Qualified Mortgage (QM)... 6 Temporary QM... 6 Safe Harbor... 7 Rebuttable Presumption... 7 Higher Priced Mortgage Loans... 7 APOR... 8 Total Loan Amount... 8 Bona Fide Discount... 8 Ability to Repay Details... 9 Introducing Qualified Mortgages Concept... 9 QM Requirements Restrictions on Loan Features Points and Fees Cap Underwriting (DTI Limit) HPML and QM Requirements Safe Harbor QM Rebuttable Presumption QM Temporary QM Points & Fees Rule Points & Fees (Included Fees) Bona Fide Discount Points Part I: testing Bona Fide Discount exclusion Part II: testing Bona Fide Discount exclusion Example Scenario #1 - Points & Fees Scenario NEW PENN FINANCIAL, LLC WHOLESALE Pg. 1

2 Example Scenario #2 Moderate Loan Amount with Above Average Comp Example Scenario #3 Lower Loan Amount with Above Average Comp Example Scenario #4 Low Loan Amount without NPF Fee Sample Loan 2.5% / With or Without NPF Fee 2% Summary Definition of a Qualified Mortgage Qualified Mortgages Four Requirements Definition of the Ability to Repay Rules (ATR) This information does not constitute legal advice nor create any attorneyclient relationship. Please contact an attorney directly, If you need legal advice, or consult a company compliance officer for specific policies NEW PENN FINANCIAL, LLC WHOLESALE Pg. 2

3 Dodd Frank Act Legislative History Title 14 of the Dodd-Frank Act created broad new consumer protections for mortgage loans. This included the creation of a Consumer Financial Protection Bureau (known as the CFPB). Most know the CFPB is responsible for oversight of consumer financial transactions and supervises banks, credit unions and other financial companies including lender and mortgage brokers. The CFPB is also now tasked with updating and enforcing several existing consumer finance laws, such as: RESPA, TILA, ECOA and Fair Lending, as well as implementing the final rules for mandates in the Dodd-Frank Act. With the 2010 Dodd-Frank Act, Congress mandated Ability-to-Repay ( ATR ) requirements for all closed-end residential mortgage loans. Congress also established a presumption of compliance with the Ability to Repay requirements for a certain category of mortgages, called Qualified Mortgages ( QM ). Don t worry, we will define these things in layman s terms over the next few pages, then we ll show how they relate to each other considering real mortgage scenarios. With Dodd-Frank now the law, the Consumer Financial Protection Bureau ( CFPB ) adopted final rules to implement the ATR/QM provisions of the Dodd-Frank Act. The rules apply to LENDER APPLICATIONS taken on or after January 10, Covered & Excluded Loan Types The QM and Ability to Repay rules, as well as the Points & Fees tests and Underwriting requirements that we are focusing on here, only apply to purchase loans, mortgage refinances, and closed-end Home Equity loans. And only apply for these loans on Primary Owner/Occupied and 2 nd Homes. Investment Properties NPF will continue to offer and will be subject to QM and ATR rules The QM and ATR rules do not apply to the following loan types (although some of the other new rules we mentioned in the intro like HOEPA and Valuation rules may apply to some) and will not be offered by New Penn. These excluded loan types are not currently offered by NPF: HELOCs Manufactured Housing Construction Loans (term of 12 mos. or less) Bridge Loans (term of 12 mos. or less) Timeshares And Reverse Mortgages NEW PENN FINANCIAL, LLC WHOLESALE Pg. 3

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5 Is the Potential Broker Impact Exaggerated? Make no mistake. The new requirements and definitions for things like ATR and QM, as well as changes we ll discuss regarding max Points & Fees charges WILL impact how some loans are underwritten and WILL impact the ability of some brokers to charge certain fees. However, there is commentary in the market which would suggest that this could lead to the demise of the broker and it simply is not true! Several players in the market have suggested that the only option for dealing with the Dodd Frank is to become a correspondent lender (or mini-corr lender) and while that might be the right path for some, it is simply not true for the majority of brokers. Towards the end of this presentation, we will review several loan scenarios to demonstrate the potential impact. NPF has done extensive testing of our historical pipeline, and we have a fairly good view of how most brokers operate with regards to loans submitted to NPF. Many brokers can and will continue to operate in the traditional model for many years to come. Of course, as you ll see later in this presentation, if a broker s business model relies on higher margins for example, those in the 2.5-3% range then, they will need to change your approach NEW PENN FINANCIAL, LLC WHOLESALE Pg. 5

6 Definitions - Terms to Know Wholesale Keep in mind, one of the most difficult aspects of fully understanding how the various regulations come together knows when one definition may exempt the rules of another or even add to the rules of another. It can be confusing, and we ll do our best to tie together each of the seemingly disparate rules. Ability to Repay (ATR) Creditors must determine that borrowers have a reasonable ability to repay a loan based on consideration and verification of factors indicative of a consumer s credit capacity, including: income/assets, employment status, monthly housing payment (PITI, HOAs and subordinate financing), other debt obligations, DTI and credit history. Qualified Mortgage (QM) Is when a home loan meets certain standards set forth by the federal government based on rules finalized recently by the CFPB. Depending on the APR, and whether is passes the HPML test, QM can be classified as Safe Harbor QM or Rebuttable Presumption (or HPML) QM. Temporary QM Is Agency eligible or government insured or guaranteed loans. For these GSE or Government loans, underwriting and documentation standards remain in place until the government agencies write their own QM rules, the GSE conservatorships end or after a period of seven years. Temporary QM must meet points and fees limits and other QM requirements but may be exempt from the 43% DTI cap NEW PENN FINANCIAL, LLC WHOLESALE Pg. 6

7 Safe Harbor Even though most lenders will likely follow the ATR requirements anyway, by combining the ATR requirements with a loan that falls under the QM rules, If the borrower ends up in default or foreclosure down the road, the lender would be considered to have legally satisfied the Ability to Repay rule. Thus, it would be harder for the borrower to sue the lender in court. This is what they call a safe harbor. Rebuttable Presumption This is related to higher priced loans. Loans that are higher-priced and meet the definition of a Qualified Mortgage have a different protection. Rebuttable presumption assumes the creditor complied with the ATR requirements. If lenders follow the QM requirements, even on a higher priced loan, the consumer would need to demonstrate that at the time of consummation the consumer s income and debt obligations left insufficient residual income or assets to meet living expenses. Higher Priced Mortgage Loans In this context, higher priced refers to a loan with an APR that is more than 1.5% higher than the published average prime offer rate on the date a rate is chosen. It is important to not confuse this APR test we are referring to as higher priced loans with the Points & Fees test discussed later. No loans will be able to exceed the points & fees test, or they will be non-qm loans for that reason alone. NOTE: POINTS AND FEES AND APR THRESHOLDS DISCUSSED IN THIS DOCUMENT ARE APPLICABLE TO FIRST LIEN LOANS ONLY. HIGHER THRESHOLDS MAY APPLY TO SUBORDINATE LIEN LOANS NEW PENN FINANCIAL, LLC WHOLESALE Pg. 7

8 APOR Average Prime Offer Rate: The Average prime offer rate means an annual percentage rate that is derived from average interest rates, points, and other loan pricing terms currently offered to consumers by a sample of creditors. The APOR is published online for a broad range of transactions in a table updated at least weekly. Total Loan Amount This definition of Total Loan Amount will be used when we discuss the Points & Fees test. The Principal Balance minus financed charges (with some charges excluded) will be used to determine the total loan amount against which the points and fees are tested. For example, if the amount financed is $100,000, but there are $4,000 in financed fees, than the TOTAL loan amount to be tested on points and fees will be $96,000. Bona Fide Discount This an amount paid to the lender by the consumer that reduces the interest rate applicable to the transaction. Discount points are bona fide when they result in a true rate reduction for each point paid and there will be tests involved to confirm they don t exceed APOR thresholds. Lenders will need to follow standard industry practice and first set PAR rates (without discount) that are available to all in a given loan scenario and then apply discounted rates to prove the discount point actually reduced the offered rate(s), THEN, they need to test those discount points within a certain range of the average prime offer rate to prove the discount point actually reduced the offered rate(s). We will cover this again in more detail with examples on the following pages NEW PENN FINANCIAL, LLC WHOLESALE Pg. 8

9 Ability to Repay Details Wholesale The final rule describes certain minimum requirements for creditors making ability-to-repay determinations, but under the general ATR test, no bright lines for determining compliance. At a minimum, creditors generally must consider eight underwriting factors: 1. Current or reasonably expected income or assets 2. Current employment status 3. The monthly payment on the covered transaction 4. The monthly payment on any simultaneous loan 5. The monthly payment for mortgage-related obligations 6. Current debt obligations, alimony, and child support 7. The monthly debt-to-income ratio or residual income 8. Credit history Creditors must generally use reasonably reliable third-party records to verify the information they use to evaluate the factors. They must use consistent application of its underwriting standards. Under the general ATR test, there is no maximum DTI. (Under the QM Ability-to-Repay test, the maximum DTI is 43 %.) There are other provisions of Ability to Repay rules that provide guidance regarding how to apply these factors. For example, in evaluating ATR for ARMs, creditors must use the maximum potential rate in the first 5 years. We are not going to cover those specific rules in this document. Loans eligible to be purchased, guaranteed or insured by GSEs or certain government agencies will need to meet such GSE s or agencies ATR requirements (which may or may not be consistent with the General ATR). The reason for outline ATR guidelines is not only to demonstrate how the UW needs to focus on ATR, but also on the generality of the rules issues. Lenders were provided criteria, but few hard rules. We expect this to develop more over time. Another important take-away here is regarding how this applies to Temporary QM because if the loan is eligible for Fannie, Freddie, FHA, VA or USDA is and meets other QM requirements, it will fall under Temporary QM. Therefore, while this ability to repay criteria on a non-agency loan may require full two year income documentation to be measured against all the factors, with the agency loans like HARP or FHA Streamline, for example will still be eligible with reduced documentation because they are automatically considered to be eligible as Temporary QM loans. Introducing Qualified Mortgages Concept Now we re ready to discuss how producing Qualified Mortgages protect lenders who are following the new ATR rules from future liability. Generally, lenders will want to start by making sure loans meet the basic requirements of QM because if it fits entirely into the QM requirements, the lenders will have Safe Harbor from potential future lawsuits regarding the ability-to-repay. If the loan does NOT meet QM requirements, as outlined on this page, then the lender may look to see if it falls into one of the Temporary QM scenarios and/or whether the loan fails only certain QM requirements that still leave a rebuttal presumption protection in place. We ll look at those other scenarios next NEW PENN FINANCIAL, LLC WHOLESALE Pg. 9

10 QM Requirements Restrictions on Loan Features Points and Fees Cap Underwriting (i.e. DTI 43%) Restrictions on Loan Features The easiest to understand is probably the restrictions on loan features. Starting in January, no loans with risky features will qualify for QM. The prohibited risky features include things like Negative Amortization, and interest-only payments, as well as loan terms greater than 30 years. In addition, the QM rules prohibit Balloon Payments (with some exception carved out for small creditors in rural areas). Therefore, any of these types of loans will not be considered QM loans, and conventional wisdom is that most lenders will not offer these types of loans until such time as a private secondary market emerges to invest in such loans. Points and Fees Cap Limiting points & fees to 3% of the amount financed. As we ll cover later, only certain fees are included in this 3%, but one of those fees is any fee to paid by a creditor or lender to a mortgage broker. For loans less than $100,000, there are slightly higher fee limits, and we ll outline those later too. There is an exception to the points limit that allows a lender to exclude Bona Fide Discount points. This will be covered shortly. Underwriting (DTI Limit) The third requirement for QM is about the Underwriting, including making sure the borrower s total debt-to-income ratio is not higher than 43 percent. To correctly calculate the ability-to-repay, the underwriter will need to consider AT MINIMUM, 8 criteria listed in the CFPB rules. The 8 factors will be covered when we discuss the ability-to-repay rule. The Underwriter will also need to take into account the MAX rate in the first 5 years, for example if the lender is offering an adjustable ARM product. HPML and QM Requirements Finally, assuming a loan meets all criteria we just listed above; it must also NOT be what is considered a Higher-Priced Mortgage Loan (or HMPL). Remember, this is the APR test measured against the Average Prime Offer Rate + 1.5%. If the loan fails the HMPL test, it may still maintain the rebuttal presumption *. Wholesale *This is where the rules can be confusing because you can potentially fail one of these 4 QM requirements, and still have a loan that will be eligible come January, so before we move on to those exceptions, let s summarize what is NOT going to be acceptable. Regardless of Temporary QM and/or Rebuttal Presumption rules, NONE of the loans will have Risky Features and NONE will exceed the Points & Fees Test NEW PENN FINANCIAL, LLC WHOLESALE Pg. 10

11 Safe Harbor QM Safe Harbor QM Criteria: Does not include restricted loan features Does not exceed the cap on Points and Fees DTI 43% And, is not Higher Priced (HPML) Loan APR APOR for comparable transaction as of date the interest rate is set plus 1.5% Rebuttable Presumption QM Presumption of ATR / Same QM Requirements Higher Priced (HPML) Loan APR > APOR for comparable transaction as of date the interest rate is set plus 1.5% Does not include restricted loan features Does not exceed the cap on Points and Fees DTI 43% In other words, if a loan fails HPML because the APR is more than 1.5% greater than the published Average Prime Offer Rate (measured on the day the rate is being selected), BUT it has no risky features; and does not exceed the 3% points & fees test; and adheres to underwriting requirements, then the lender would be PRESUMED to have followed the Ability to repay requirements NEW PENN FINANCIAL, LLC WHOLESALE Pg. 11

12 Temporary QM Temporary QM Criteria: Does not include restricted loan features Does not exceed the cap on Points and Fees Expanded UW criteria / Not subject to 43% DTI If eligible for purchase or guaranteed by GSE; FHA; etc. The final rule provides for a second, temporary category of qualified mortgages that have more flexible underwriting requirements so long as they satisfy the underwriting requirements of, and are therefore eligible to be purchased, guaranteed or insured by either (1) the GSEs while they operate under Federal conservatorship or receivership; or (2) the U.S. Department of Housing and Urban Development for example, FHA loans or the Department of Veterans Affairs and VA loans, or Department of Agriculture or Rural Housing Service and their USDA Rural Housing programs. It is an important distinction that the loan does not necessary need to BE purchased by Fannie, Freddie, FHA, etc., the Loan need only be ELIGIBLE to be purchased, guaranteed or insured by one of these entities. *** It is important to note, again, that these loans must still meet the QM rules regarding the prohibition of risky features and these loans must pass the 3% Points & Fees test, but if for example there was a HARP eligible Fannie loan with DTI approved over 43%, this would be OK because the loan meets the Temporary QM requirement as being eligible by having the approved/eligible DU findings. Temporary QM will either be Safe Harbor QM or Rebuttable Presumption depending on HPML. This means the loan meets QM requirements (except maybe the DTI issue) and is granted Safe Harbor under Temporary QM, or the loan meets QM requirements (except the DTI) AND also exceeds the higher priced HPML threshold. This would then be a Rebuttable Presumption (or HPML) QM loans. This temporary provision will phase out over time as the various Federal agencies issue their own qualified mortgage rules and if GSE conservatorship ends, and in any event after seven years NEW PENN FINANCIAL, LLC WHOLESALE Pg. 12

13 QM Rules simplified (Pyramid Graphic) Let s summarize the rules we just discussed in the graphic below before we move onto the Points & Fees rules, which we know many brokers may be anxious about. First, we discussed QM, which are those loans that are NOT Higher-Priced and that meet all the requirements set forth, such as: it has no risky features; and meets underwriting requirements like max 43% DTI; plus it passes the points & fees test. These loans will be granted SAFE HARBOR from future ability to repay lawsuits, which makes them much less risky. Next Temporary QM loans: These are the loans that are eligible to be purchased or insured by one of the Government Entities, and so long as they still have no risky features and meet the points and fees test, they will be considered QM for now, and will allow expanded underwriting requirements, such as a DTI over 43%. These too will be granted safe harbor. The third group we discussed is those loans that happen to be considered Higher-Priced. If those loans meet ALL other QM requirements, they will have a rebuttable presumption (or an assumption that ability to repay was followed), but the consumer could try to prove otherwise. It is a little more risky, but with strong underwriting and a focus on the ability to repay at time of consummation, the lender should be fairly well protected. Safe Harbor QM Temporary QM GSEs / FHA / VA / USDA Higher Priced QM Safe Harbor QM, which are those loans that meet all 4 criteria, such as: it has no risky features; and meets ATR and underwriting requirements like max 43% DTI; plus it passes the points & fees test and they are NOT Higher-Priced. These loans will be granted SAFE HARBOR from future ability-to-repay lawsuits. Temporary QM: These are the loans that are eligible under one of the Government Entities, and they will be considered QM for now, but will allow expanded UW, such as a DTI over 43%. These will be granted safe harbor if they are not HPML OR Rebuttable Presumption QM if they are deemed to be Higher Priced Mortgages. Higher Priced QM: HERE are those loans that happen to be considered Higher-Priced. If those loans meet ALL other QM requirements, they will have a rebuttable presumption (or an PRESUMPTION that ability to repay was followed), but the consumer could try to prove otherwise NEW PENN FINANCIAL, LLC WHOLESALE Pg. 13

14 Points & Fees Rule The final rule is the Points & Fees test. For a loan to be a QM, the points and fees may not exceed the points-and-fees caps. The points-and-fees caps are higher for smaller loans. Here is a breakdown of the fee limits based on loan amount: 3 percent of the total loan amount for a loan greater than or equal to $100,000 (Remember, the total loan amount is the amount financed minus fees included in the loan amount. We ll expand on this in our next example) The next step down is a $3,000 fixed dollar cap for a loan greater than or equal to $60,000 but less than $100,000. (Please note that a $100,000 new loan amount, with $4000 in APR fees, will actually be tested as a $96,000 total loan amount and fall into this category) Next is the 5 percent limit on a total loan amount for a loan greater than or equal to $20,000 but less than $60,000 As well as, $1,000 for a loan greater than or equal to $12,500 but less than $20,000 And, finally, 8 percent of the total loan amount for a loan less than $12,500 We ll review some scenarios before we re done today to demonstrate how this may impact certain brokers, but first let s look at what is INCLUDED in the Points & Fees NEW PENN FINANCIAL, LLC WHOLESALE Pg. 14

15 Points & Fees (Included Fees) For the purposes of the Points & Fees test, we need to know what counts as part of the 3%. Here is a summary list that captures the most common types of fees. Starting with those that should always be included: 1. Loan origination fees, for example, when NPF charges an UW or Admin fee, it would be included. 2. Commitment Fee similarly, where allowed (such as NJ or NC), NPF may charge a commitment fee. 3. Compensation to Broker. This may be one of the most important facets of the final rule, and one we will cover shortly in our scenarios. In the final rule, the CFPB applied the inclusion of the compensation fee ONLY to wholesale brokers. Therefore, a retail lender wouldn t include the LO compensation in their total fee test, and similarly a correspondent or mini-corr lender would not include LO comp. 4. Upfront mortgage insurance paid by the BORROWER (such as borrower-paid single premium MI) is included UNLESS it is less than the current FHA premium of 1.75% AND it allows for some pro-rated refund for early cancellation. At this time, we are still learning about plans from MI companies to offer such a refundable product on conventional loans, so it is possible lenders may no longer be able to offer borrower-paid single premium until these QM qualified borrower-paid single-premium MI programs are established. 5. Third party charges are only to be included when they are from affiliated companies of the creditor. For example, when NPF requires the use of an affiliated AMC, then the portion of the AMC fee retained by NPF will be included. We ll see this in the scenarios we cover today. 6. Discount Points must be included if they are not bona fide, meaning they do not actually reduce the offered rate. We ll cover the definition in more detail on our next slide. Discount Point in excess of the amount that CAN be excluded as Bona Fide would also need to be included. 7. Finally, there is a category for fees that are considered part of the financed charges and are included in the APR that could be part of the 3% fee test. However, based on guidance we ve received regarding the fees that are exempt, we expect very little or no additional fees to be included in the 3% testing. Other than these types of fees, many other fees are NOT included in the 3% fee test, and they include 1. Prepaid Interest. 2. The next three on the list are all types FHA, VA and USDA insurance, funding or guarantee fees, which are not included. 3. NONE of the truly arms-length third-party fees are included, so unless they are affiliated with the lender, one would not need to include title insurance, appraisal fees, etc. 4. Again, discount points are only included if there cannot be demonstrated to be bona fide, and are not in excessive of the max exclusion allowed of 2%, which will look at next. 5. Escrows for taxes and insurance, as well as insurance premiums, etc. are not included NEW PENN FINANCIAL, LLC WHOLESALE Pg. 15

16 Bona Fide Discount Points Part I: testing Bona Fide Discount exclusion When considering whether a Discount Point must be included in the 3% test or not, it is important to understand whether the consumer is being offered a Bona Fide discount. The following is criteria that must apply and the lender must demonstrate that they use standard industry practice in determining whether points are truly resulting in discounted rates: 1. The par rate should be the rate available to the consumer based on the particular consumer s profile and loan characteristics. The starting par rate does not have to be a rate with zero points, but if no Zero Point rate is available, we use the next nearest rate with a premium (or a rebate), PLUS The PAR rate must include the LLPAs and other specific adjustments applicable to that consumer. 2. PAR methodology must meet industry standards, which all of NPF rate sheets will. Explained another way, If a lender makes available to specific consumers a PAR rate of, say 5%, then offers a truly discounted rate with points being paid while following standard industry practices, then it will have passed Part 1 of this test Part II: testing Bona Fide Discount exclusion Assuming one determines that they are truly offering a bona fide discount that is reducing the consumers PAR rate, they still need to limit the exclusion based on published Average Prime Offer Rates (or APOR). Not to be confused with the HMPL test which measure the overall APR compared to the average prime offer rate, in this test we are measuring our Discounted RATE against the APOR. Once the APOR is established and compared to the offered rate, the following applies: 1. Up to 2 discount points can be EXCLUDED from the 3% fee test, if interest rate without the discount does not exceed the APOR by more than 1%. 2. But, only 1 discount point max can be excluded, if the offered interest rate exceeds APOR by more than 1% but less than 2%. Let s look at two examples. Based on the Federal Financial Institutions Examination Council, and published on the FFIEC website, the Average Prime Offer rate the week of November 18 th was 4.41%. 1. Therefore, a lender offering a discounted rate of 5.41 or less can exclude up to 2% in discount. 2. However, a lender offering a discounted rate of 5.5%, for example, which is more than 1% higher than the APOR would be limited to excluding only 1% of discount. Any Discount Points above the 1-2% excluded, must be added into the 3% Points & Fee Calculation NEW PENN FINANCIAL, LLC WHOLESALE Pg. 16

17 Example Scenario #1 - Points & Fees Scenario High Loan Amount / High Fees & High Comp In our first example, we ll look at a Large Loan Amount that also carries HIGH fees, and assume the broker is electing above average comp. This is probably the easier scenario because the large loan amount allows for plenty of room within the 3% limit to cover fees, broker comp and points. For a broker that wishes to declare a higher comp like the 2.5% in this example, NPF would expect them to use a NO FEE rate sheet, but for demonstration purposes we left the NPF fee in the calculation as well. Let s take a look at how it adds up : *** The loan amount is $800,000, in this example. *** As mentioned, we are adding CA NPF fees of $995, even though the broker electing higher comp could use a NO FEE rate sheet. *** The broker compensation is higher than average at 2.5% which equals $20,000 *** We have no Borrower Paid single-premium MI to offer at this time *** As with all examples, we ll assume the use of an affiliated AMC, and we have to include $125 for that. *** We don t have non-bona fide points to add. *** And, continuing the high fee theme, we re including some incidental non-affiliated 3 rd party fees (even though things like title insurance which can be excluded, and at this time we don t plan to include any other non-affiliated third party fees to our Points & Fees test). *** All of that equals $21,370. *** 3% of the total loan Amount (less financed fees) would be $23,370 *** In this case, with higher than average comp and including NPF fees, and some extras, it still passes In this case, even with higher than average comp and high fees, it PASSES! NEW PENN FINANCIAL, LLC WHOLESALE Pg. 17

18 Example Scenario #2 Moderate Loan Amount with Above Average Comp Wholesale In our next example, we cut the loan amount in half, and we are still using higher Zone 1 NPF fees, so here s how it breaks-down: *** The loan amount is $400,000, in this example. As mentioned, we are adding CA NPF fees of $995, even though the broker electing higher comp could use a NO FEE rate sheet. *** The broker compensation is still higher than average at 2.5% which equals $10,000 *** The change in loan amount brings the total to $11,370 *** 3% of the total loan Amount (less financed fees) would be $11,670 *** In this case, with a lower loan amount, and above average comp along with including NPF fees, and some extras, it still passes NEW PENN FINANCIAL, LLC WHOLESALE Pg. 18

19 Example Scenario #3 Lower Loan Amount with Above Average Comp Wholesale In our third example, we reduced the loan amount again, and we switched to lower NPF fees because smaller loan amounts are typically outside Zone 1 pricing. Here s how this one adds-up: *** The loan amount is $250,000, in this example. As mentioned, we are adding a NJ commitment fee of $800. *** The broker compensation is still higher than average at 2.5% which equals $6,250 *** At this loan amount the total is $7,425 *** 3% of the total loan Amount (less financed fees) would be $7,282 *** In this case, with a lower loan amount, it fails *** However, it fails the test by only $143. There are multiple ways to solve this. First of all, we are not anticipating any additional finance charges other than the affiliated third-party fees already included in our example, but we ve modeled this with $250 as a cushion, so in reality this too would pass. In addition, the vast majority of brokers working with NPF have elected compensation well below 2.5%. In fact, average broker comp overall, for all of 2013 is about 2% (really between 2.12% when borrower paid, and 1.9% when lender paid). So all of those brokers would still pass, as well. We need to reiterate also that NPF will be offering NO FEE rate sheets for those brokers that want more control over the maximum comp declarations. Slightly higher rates to offset may not be a big deal on lower loan amounts like this one. And, there will be the option to price a loan with lock lender credits and use that for example, to offset the NPF fee. If we removed the NPF fees on this one, even at 2.5% broker comp, or applied a lock lender credit, it would still pass Let s look at one more example NEW PENN FINANCIAL, LLC WHOLESALE Pg. 19

20 Example Scenario #4 Low Loan Amount without NPF Fee In our fourth and final example, we are demonstrating the use of a NO FEE rate sheet. With a NO FEE rate sheet, but still assuming the use of an affiliated AMC, and keeping our $250 cushion, the loan passes even at the lowest thresholds. In this case, we ll see how it works with NO NPF fees, but alternatively, a broker could choose slightly lower comp declaration, which we ll highlight on our next slide. *** The loan amount is $100,000, in this example. *** As mentioned, we are assuming the use of a No FEE rate sheet on this one. *** The broker compensation is still higher than average at 2.5% which equals $2,500 *** With these changes, and including the affiliated fee and $250 cushion, the total is $2875 *** REMEMBER the total loan amount (less financed fees) will be less than $100,000, so we test using a flat $3000. *** In this case, without NPF fees, it passes As you ll see on the next slide, brokers will have the option to use NO FEE rate sheets and still declare a higher than average comp structure, or they can use more competitive rate sheets, including the NPF fees, and declare a slightly lower comp. NPF will be building tools to be posted to our client website to help brokers conduct these tests on their own prior to submitting NEW PENN FINANCIAL, LLC WHOLESALE Pg. 20

21 Sample Loan 2.5% / With or Without NPF Fee 2% Here we see a few options when dealing with average loan amount sizes: 1. In our first example, based on a broker s elected comp of 2.5% and assuming the addition of Zone 1 NPF fees of $995, the scenarios will start to fail points & fees testing when you go below $225, But, if the same broker used a NO FEE rate sheet, for loans below $250,000, then the scenario wouldn t fail at any loan amount even below $100k. 3. Or, another option, as we see in this third chart, if the broker wanted to still use FEE rate sheets and include the NPF fees, but had an average comp declaration of 2% instead (which is the average current comp declaration for NPF clients), they would pass most scenarios until they got down around the $100,000 mark. Summary Definition of a Qualified Mortgage The rule provides a safe harbor for QMs that are not higher-priced. This safe harbor means that a defaulting borrower is unable to challenge a Lender s calculation of ability to pay in a foreclosure action. Loans that are higher-priced and meet the definition of a Qualified Mortgage have a different protection, that of a rebuttable presumption that the creditor complied with the ATR requirements. Qualified Mortgages Four Requirements 1. Restrictions on risky loan features, 2. Limits on points and fees, 3. Underwriting, Standards including the borrower s total debt-to-income ratio is not higher than 43 percent. 4. Pass Higher-Priced (HPML) APR test For a temporary, transitional period, loans that are eligible for sale or guarantee by a GSE (ex. FNMA, FDMC) will be considered Qualified Mortgages. Definition of the Ability to Repay Rules (ATR) Under the ATR standard, New Penn must make a reasonable, good-faith determination before or upon the consummation of a covered mortgage loan that the consumer has a reasonable ability to repay the loan. A reasonable, good-faith ATR evaluation must include eight ATR underwriting factors using information produced by a Reasonable Reliable Third Party NEW PENN FINANCIAL, LLC WHOLESALE Pg. 21